Sandy distorts data, so investors look to Fed, Washington for clarity

After smashing through the Northeast late last month, the storm has badly infected all the data normally used to judge the health of the economy. And it may take another month or two before the distortions fade.

The upshot: investors are flying half blind. They’ll need to look elsewhere for information to guide their decisions to buy or sell.

In a holiday-shortened week light on data, that means focusing on Washington’s efforts to avert the onset of big tax increases and deep spending cuts scheduled to take place in January. Economists warn the U.S. could slip back into recession if the so-called fiscal cliff is not addressed before the end of the year.

Investors will also keep a close eye on Federal Reserve Chairman Ben Bernanke. He’s scheduled to address economists in a speech in New York that could yield more clues on the central bank’s future intentions.

“The main event this week will be Ben Bernanke’s speech before the Economic Club of New York,” said Neil Dutta, director of economics at Renaissance Macro Research.

Fresh look at housing

Before Bernanke speaks, Wall Street will get another look at a housing market that has been on the mend following its worst downturn in modern times.

Sales of existing homes in October are expected to rise slightly, according to economists surveyed by MarketWatch. Sandy did make landfall until late October after most closings were likely completed, economists say.

Reuters

Debris litters the entrance inside the South Ferry subway station after it was flooded by seawater in the aftermath of Hurricane Sandy.

Yet construction on new homes, which the government reports Tuesday morning, probably fell in October, the MarketWatch forecast predicts.

Some builders in the Northeast delayed work because of the storm, though construction normally tapers off in the cold weather. Economists also think the market is due for a pause after a surge in construction in the spring and summer.

Still, the housing report will yield clues on what’s going in the parts of the country not battered by the hurricane, especially the South. That’s where home construction has been strongest.

“You want to focus on areas outside the Northeast,” said economist Sal Guateri of BMO Capital Market. “The housing report will tell us about economic activity in the other regions.”

Even with a recovery finally underway, the housing sector is still fragile. Demand for new homes is quite low by historical standards and mortgage loans are not easy to come by. Banks are reluctant to lend except to the most credit-worthy borrowers.

The content of the Fed chairman’s speech later Tuesday will be on the pretty broad subject of the economic recovery and economic policy. Analysts expect Bernanke to amplify on the Fed’s most recent efforts to generate stronger economic growth in the U.S.

Fiscal cliff

Ongoing talks in Washington about the fiscal cliff remain a pressing concern.

The Dow Jones Industrial Average
DJIA, -0.05%
has shed more than 600 points, or 5% of its value, since the presidential election on worries that lawmakers will fail to reach a compromise. Some investors are also taking profits now on anticipation that taxes on investments will increase in 2013.

Congress is on recess during the week of Thanksgiving, but leaders in both parties say they plan to continue their discussions.

“We have the cornerstones of being able to work something out,” Senate Majority Leader Harry Reid, the Nevada Democrat, said Friday after a bipartisan meeting at the White House. “We are going to work during the Thanksgiving recess.”

The looming threat of the fiscal cliff is very worrisome to business leaders, some of whom say they are awaiting a resolution before they make any major decisions.

“Businesses are telling us they are holding back on spending and hiring because they are concerned about the fiscal situation,” said Ryan Sweet, an economist at Moody’s Analytics.

Yet so far, economists say, concerns about the budget impasse haven’t acted as a major drag on the U.S. economy. It’s still growing around 2%.

The danger is that a prolonged stalemate will start to pull the economy down. If Washington doesn’t cobble a compromise together by late December, markets are likely to freak out.

So will millions of Americans when they see their stock portfolios sink and the U.S. head toward an economic abyss. That’s why the odds still favor a deal.

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